Smart Fiscal Consolidation: Highlights of the Study Jürgen Matthes Head Department International Economic Order

Size: px

Start display at page:

Download "Smart Fiscal Consolidation: Highlights of the Study Jürgen Matthes Head Department International Economic Order"

Abel Miller
5 years ago
Views:

1 Smart Fiscal Consolidation: Highlights of the Study Jürgen Matthes Head Department International Economic Order CES, Food for Thought Series, Brussels, June 9, 2013

2 Background Intense and controversial debate about austerity vs. growth Hope for expansionary fiscal consolidation worked in the past but this time was (really) different Fiscal multipliers larger in recessions and in case of simultaneous consolidation courses in many countries Confidence crisis impeded regaining credibility (until ECB s OMT) Monetary policy did cut interest rates and provided liquidity, but interest rates for private sector have not declined (transmission mechanism broken) Exchange rate depreciation was not possible World trade growth relatively slow Danger of self-defeating austerity, but only in the short run Economic growth needs to return soon to make fiscal consolidation politically sustainable Impressive fiscal consolidation in some countries

3 Progress in fiscal consolidation Cyclically adjusted primary balance in percent of GDP 10.0 highest primary deficit btw IRL GR SP I P Quelle: EU-Kommission, IW Köln

4 Timing and Structure of SFC Austerity debate too polarised not if, but how is important Objective: reconcile fiscal consolidation and growth as far as possible Timing: Gradual approach frontloading only as much as necessary depending on dangers for debt sustainability / financial market sentiment Solid and credible medium term reform strategy needed (+communication) Recent CSRs attempt to follow this approach by focusing on progress in structural consolidation and by pushing for structural reforms Let automatic stabilisers work to some extent, but no time for fiscal stimulus SGP rules were not broken, but deadline extension very generous for F Structure: Expenditure based consolidation packages are more successful and growth-friendly than those based on revenue increases Initially tax increases are politically easier and usually faster to implement But Consolidation should be largely expenditure based Comprehensive expenditure reviews shoud identify efficiency potentials

5 Approach of our study More strategic and encompassing approach to fiscal consolidation Use opportunity to make expenditures and taxes more growth friendly and welfare enhancing Identify concrete fiscal consolidation measures which attain the following four objectives: Effective impact on fiscal deficit Foster long term growth potential Limit negative impact (or have positive impact) on short term growth Impact on social fairness Evaluation of consolidation measures along these lines by drawing on a rich economic literature

6 Some examples for SFC-Recommendations Pension and health system reforms focused on long term sustainability Large positive effects on consolidation, particularly in the long term, but also in the short term Health expenditure 15% of total government spending in OECD countries Possible increases in health efficiency (ranging from 1% in P to 4.8% in IRL - OECD) Adopt best practices to raise health of population Fosters long term growth by reducing social security contributions and by possibly lowering interest rates Short term growth effect neutral and possibly positive Positive for social fairness, as health outcomes is enhanced and intergenerational equity is likely improved

7 Some examples for SFC-Recommendations Increase efficiency of and moderatly raise government investment Large efficiency potentials allow for limited (gross) spending increase budgetary savings of 1% of GDP in education spending (according to OECD) 60 % efficiency potential ( 180 bn) in public infrastructure investment (according to MGI) Currently problematic consolidation priorities: : 1/5 of consolidation based on cuts to public investment (EZ, UK and US) Limited or neutral effect on fiscal consolidation Positive effects on economic growth in the long and possibly short term Possible increase in social fairness if access to education improved for disadvantaged groups

8 Some examples for SFC-Recommendations Reduce public sector wage bill Large positive effects on fiscal consolidation (10% of total govt spending in EU) Overstaffing and partly overpayment in public sector Limited increase in long term growth (due to increases in labour re-allocation to private sector and lower taxes) Limited negative impact on short term growth (as public employees small share of consumers) Positive for social fairness, if overpayment of public employees is reduced

9 Further examples for SFC-Recommendations Social spending: better targeting, lower disincentives, moderately increase active labour market policies (flexicurity) Shifting the tax burden from labour to consumption (fiscal devaluation) Privatisation Cutting subsidies Increase taxes on property and the environment

10 In addition Conflict: Important growth enhancing measures are costly (e.g. investments in infrastructure, R&D, education) Search for (largely costless) reforms which are growth enhancing and contribute to fiscal consolidation Reform of the public sector to increase of efficiency, e.g. Tackling tax evasion Fiscal management and budget controls Reform of state owned enterprises Sunset legislation Fiscal Rules and Fiscal Councils to improve (fiscal) policy making Structural reforms of labour and product markets!!! High growth pay-off (e.g. 4% of GDP for reforms of Mario Monti, OECD) Social equity increased when insider-outsider problem effectively targeted

11 Thank you for your attention Jürgen Matthes Head Department International Economic Order

Asia Europe Economic Forum, Tokyo

Facing the aftermath th Which reforms to rebalance the world growth? Lorenzo Codogno Asia Europe Economic Forum, Tokyo Italy s Ministry of Economy and Finance (MEF) Italy s Ministry of Economy and Finance